The Japanese yen has recently been in strong demand as a “safe haven” for investors on the topic of the risk off sentiments associated with the trade war between the US and China.
On the daily chart of the USDJPY currency pair, we see a clear downward long-term channel.
Mirror resistance zone R1 (pink zone) and demand zone (support) S1 (green zone). The long-term trend for the pair is definitely a downtrend.
However, I want to draw your attention to the last four daily candles. We see a strong white candle from the demand zone and then three inside bars in succession. These candles are highlighted on the daily chart with a blue oval. This tells us about the strong degree of uncertainty among large traders on this currency pair.
As we recall, the white candle was formed as a result of the market reaction to the partial abolition of tariffs on Chinese goods. In case of further reduction in risk sentiment, we will be able to see at least a strong correction on the USDJPY pair.
Several inside day bars led to the formation of a technical figure triangle. The last trading day of the past week closed inside the triangle and within the day the price movement found support at the hourly 100 SMA (red), and the resistance was made by the 4-hour 100 EMA (blue on the chart).
At the moment, the triangle and its faces are the main model, which must be observed by traders who trade the Japanese yen on forex. A breakdown of one of the faces can provide a good directional price movement. Supply / demand zones (green/pink) are the first targets of buyers or sellers of the USDJPY pair.
The key to understanding the possible direction of the USDJPY pair may be the strong correlation of the pair with the yield of US government bonds. We already know that during periods of stock market decline in the US, the Japanese yen tends to strongly correlate with the S&P500 index. However, now the situation is somewhat different.
As you can see from the daily chart above, in June this year, the USDJPY pair (blue line) broke the correlation with the S&P500 index (orange line) and tied to the yield on 10-year US bonds. This connection still persists.
Last week, there was a lot of talk about inverting of the US bond yield curve and falling yields on 30-year bonds below 2%. According to statistics, this is a very strong sign of an impending recession in the United States. However, do not forget that according to the same statistics, a recession usually occurs 1.5-2 years after the inversion of the yield curve. A lot can change during this time, and the market has a very weak ability to predict the actions of the Fed.
In any case, American bonds are heavily overbought at present and a decrease in risk sentiment can send a yield significantly higher than today’s levels. And this, in turn, will lead to the sale of risk-off assets – the Japanese yen, gold and the Swiss franc.
Thus, if you trade the Japanese yen, you need to begin to closely monitor the situation with the yield of US bonds. And do not forget about the triangle.